Regulators to mull future of controversial ‘Volcker Rule’

Federal regulators this week will weigh the future of a controversial rule meant to curb excessive risky behavior on Wall Street.

Members of the Financial Stability Oversight Council (FSOC) will meet Friday afternoon to discuss potential changes to Dodd-Frank financial reform law’s “Volcker Rule,” which bans banks from making “proprietary” trades with their own capital and not on behalf of their customers.

Named after former Federal Reserve Chairman Paul Volcker, the rule is meant to ban banks from engaging in risky trades that could limit their ability to respond to a financial crisis. But banks have long said the rule needs clarity, imposes crushing burdens on smaller firms that lack the influence to trigger a crisis and prevents banks from making safer investments that will boost their ability to lend.

{mosads}Banks have complained for years about the rule, and secured some delays under former President Barack Obama, but have an opportunity to win major limits under President Trump. The FSOC will meet next Friday to discuss revisions to the Volcker Rule suggested in the Treasury Department’s first financial regulatory blueprint in June.

While Treasury’s suggestions are part of Trump’s push to “dismantle” Dodd-Frank, regulators have said for months that changes would be on the way. The Federal Reserve on Friday announced the Volcker Rule wouldn’t be enforced for foreign banks, and senior Fed officials have publicly supported further changes to the rule.

Federal Reserve Board Chairwoman Janet Yellen told lawmakers earlier this month she’d support modifying the Volcker Rule. Federal Reserve Governor Jerome Powell, the bank’s chief regulatory supervisor, suggested focusing the rule on firms with major investment practices while reducing the compliance burden for smaller banks.

“There is room for eliminating or relaxing aspects of the implementing regulation that do not directly bear on the Volcker Rule’s main policy goals,” Powell said.

The Fed is one of five federal agencies responsible for implementing the rule, along with the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission. The leaders of all five agencies are voting FSOC members, though the Friday meeting is unlikely to produce major changes right away.

Instead, regulators are scheduled to discuss the Treasury’s June recommendations. Treasury Secretary Steven Mnuchin said in the report that the department supports the rule “in principle,” but only with changes to loosen the compliance burden and a more specific definition of proprietary trading.

“Banks with access to the federal safety net — FDIC insurance and the Federal Reserve discount window — should not engage in speculative trading for their own account. Insured banks that engage in proprietary trading enjoy a government-conferred advantage that invites moral hazard,” the report reads. “In its design and implementation, however, the Volcker Rule has far overshot the mark.”

“Undue constraints on market making present risks to market liquidity, particularly during times of stress,” Mnuchin said.

Treasury also suggested waiving the Volcker Rule for banks with less than $10 billion in assets and only enforcing the rule on banks above that threshold if they reach a certain level of trading assets and liabilities.